EXHIBIT 10.5

                            EMPLOYMENT AGREEMENT
                            --------------------

      THIS AGREEMENT is made effective as of the 1st day of January, 1997, 
by and between MERCHANTS BANK, a state chartered Bank, and MERCHANTS 
BANCSHARES, INC., a Delaware corporation, both with principal offices at 275 
Kennedy Drive, South Burlington, Vermont, (hereinafter collectively referred 
to as "CORPORATIONS") and JOSEPH L. BOUTIN, residing at 63 Morrill Drive, 
Burlington, Vermont 05401 (hereinafter referred to as "EMPLOYEE").

                                 WITNESSETH
                                 ----------

      In consideration of the mutual covenants herein contained, the parties 
agree as follows:

      1.  Employment:  The CORPORATIONS hereby employ the EMPLOYEE, and the 
EMPLOYEE hereby accepts employment.

      2.  Terms and Renewal:  This Agreement shall be for a term beginning 
on January 1, 1997, and terminating on December 31, 1999.

      On December 31, 1998, the CORPORATIONS shall notify EMPLOYEE if 
CORPORATIONS do not intend to renew the Agreement for a one-year term 
following its original term.  In the event that the CORPORATIONS do not 
notify EMPLOYEE, the Agreement shall renew for a one-year term following its 
original term.  Similarly, on each anniversary date thereafter the 
CORPORATIONS shall notify EMPLOYEE if they do not intend to renew the 
Agreement, and upon a failure to do so the Agreement shall automatically 
renew for an additional one-year term following the then applicable term.

      3.  Termination:

            3.1  Discharge:  The CORPORATIONS have the right to discharge
      the EMPLOYEE at any time with or without just cause, as herein defined.
      If the EMPLOYEE is discharged without just cause, the CORPORATIONS
      agree to pay in one lump sum the EMPLOYEE's salary, plus pay or provide
      as or when due all other normal benefits and Accrued Incentive Payments
      as provided herein, for one year from the date of such discharge or the
      balance of the time remaining under the terms of Agreement, whichever
      is greater.  "Accrued Incentive Payments" shall mean the payment of
      incentive amounts, the precondition of which has occurred or will occur
      at or upon the expiration of the relevant Fiscal Period to which such
      incentive may be applicable.  The EMPLOYEE may elect to receive the
      payments over a five (5) year period, such payments to be in an amount
      equal to the net present value of the lump sum payment if paid
      immediately.

            "Just cause" shall mean (a) misconduct connected with EMPLOYEE's
      work, if and as defined in any written policy of the CORPORATIONS
      covering all of the CORPORATIONS' officers or directors which is now,
      or subsequently, in effect; or (b) the conviction of a felony which
      precludes EMPLOYEE from performing all or an essential part of his
      duties of employment, provided that, if such conviction is subsequently
      reversed, rescinded or expunged, it shall not constitute just cause for
      termination.

            3.2  Disability:  In cases of disability, either party may elect
      to terminate the employment, subject to the following conditions: (i)
      the EMPLOYEE shall receive the greater of: (a) the compensation and
      other normal benefits plus Accrued Incentive Payments which the
      EMPLOYEE would have received had he been terminated without just cause;
      or (b) the benefits payable to, and actually paid to, the EMPLOYEE
      arising out of any disability insurance policy covering the EMPLOYEE,
      and paid for by the CORPORATIONS.  If said policy benefits are paid
      other than in a lump sum payment, the value of the benefits, for
      purposes of this Agreement, shall be calculated by using a present
      value of all payments to be made; and (ii) EMPLOYEE has suffered a
      disability as defined below.

            "Disability" shall mean mental or physical incapacity which shall
      continue for six (6) months or longer after exhaustion of all sick leave
      benefits, or a permanent mental or physical incapacity, either of which
      makes the performance of substantially all of the EMPLOYEE's duties
      impossible, as certified in writing by the EMPLOYEE's physician.  The 
      CORPORATIONS, in the event of disagreement, may seek the opinion of a
      qualified physician to determine if such disability exists; provided,
      however, that such physician is Board Certified in the area of specialty
      pertinent to the nature and extent of such disability.  In the event of
      further disagreement, the two physicians shall choose a third physician,
      qualified as above, who shall make the determination, which shall be
      binding upon the parties.

      4.  Resignation by the EMPLOYEE:  The EMPLOYEE shall have the option 
of terminating his employment with the CORPORATIONS provided he gives at 
least 60 days advance written notice to the CORPORATIONS.  The EMPLOYEE 
shall not be deemed to have resigned and, instead, shall have been deemed 
discharged by the CORPORATIONS, without just cause, if the EMPLOYEE resigns 
as a result of: (i) immoral, unethical or illegal acts or omissions 
committed by, or which reasonably appear will be committed by, any director, 
officer, employee, agent, or independent contractors of the CORPORATIONS 
(and the CORPORATIONS' Boards of Directors shall not act, after his 
recommendation, to terminate the offending party(s) or to cease and desist 
such offending activity); (ii) acts or omissions of any director, officer, 
employee, agent, or independent contractors of the CORPORATIONS which could 
reasonably subject the EMPLOYEE to personal liability from any Federal, 
State or local government or agency, or any banking authority, including, 
but not limited to, the Federal Deposit Insurance Corporation, the Internal 
Revenue Service, or the Securities and Exchange Commission; (iii) 
fundamental disagreements over basic corporate philosophies and/or corporate 
business plans.

      5.  Offices and Duties:  The EMPLOYEE shall be appointed and/or 
elected, and shall serve, as the President and Chief Executive Officer of 
the CORPORATIONS and as a Director of Merchants Bank for the term of his 
employment hereunder.  The CORPORATIONS intend and shall use their best 
efforts to ensure EMPLOYEE's retention as a Director of Merchants 
Bancshares, Inc. at subsequent annual meetings of its shareholders.  Should 
the CORPORATIONS decide to alter the titles and/or positions, they must 
provide the EMPLOYEE with an essentially equivalent or better position, with 
equivalent or better salary and benefits.

      The CORPORATIONS will also use their best efforts to secure the 
Agreement of as many shareholders, if such are required, as are necessary to 
authorize this Agreement and any contemporaneous agreements required to 
perform the same on the part of the CORPORATIONS and to elect the EMPLOYEE 
to the Board of Directors of each of the CORPORATIONS.

      6.  Efforts:  The EMPLOYEE shall devote his full-time efforts and 
energies to the business and affairs of the CORPORATIONS and shall use his 
best efforts, skill and abilities to promote the CORPORATIONS' interests.

      7.  Evaluation:  The EMPLOYEE shall be evaluated annually by the 
Boards of the CORPORATIONS and shall receive a written copy of said 
evaluation.  Nothing herein shall allow the CORPORATIONS to reduce the 
salary, incentive payments and other benefits provided for herein; nor shall 
this provision be deemed to allow for the alteration of EMPLOYEE's duties 
and authority otherwise set forth in this Agreement; provided, however, that 
the performance of a condition within any regulatory order, memorandum of 
understanding or requirement shall not be affected by this provision.

      8.  Salary and Increases:  The CORPORATIONS shall pay the EMPLOYEE for 
all services rendered an initial salary of $200,000.00 per annum, commencing 
January 1, 1997, and payable on a bi-weekly basis.  The annual salary will 
be reviewed annually by the Board and may be increased but not decreased at 
the discretion of the Board.  The CORPORATIONS may also grant the EMPLOYEE 
such other compensation, bonuses, benefits, etc., as they may deem proper 
from time to time.

      9.  Annual Bonus:  An annual bonus will be paid to the EMPLOYEE 
provided the CORPORATIONS maintain a "CAMEL" rating of 2 or above, and the 
CORPORATIONS achieve a target ROE, set annually by the CORPORATIONS Boards 
of Directors' Compensation Committee, equal to or greater than the median 
ROE of a defined group of bank holding companies and banks ("PEER GROUP").  
The PEER GROUP will be comprised bank holding companies and independent 
commercial banks located in the Northeast (New England, New York, 
Pennsylvania and New Jersey), which have assets equal to at least 50% but 
not more than 200% of the assets of Merchants Bancshares, Inc.  If the 
targets are met, the EMPLOYEE will receive a minimum bonus equal to 35% of 
base salary for the performance year.  The maximum bonus will not exceed 75% 
of base salary.

      For the first year of this Agreement the minimum bonus threshold shall 
be the 65th percentile of the PEER GROUP.  The maximum bonus threshold will 
be the 90th percentile of the PEER GROUP.  Bonus awards between 35% and 75% 
will be interpolated (using linear progression).

      10.  Benefits:  The CORPORATIONS shall provide the EMPLOYEE with all 
fringe benefits (including but not limited to health, life, disability, 
workers compensation insurance; vacation and sick pay; pension benefits) 
offered to other employees of the CORPORATIONS in subordinate positions, but 
shall provide EMPLOYEE with five (5) weeks per year of vacation.

      11.  Supplemental Pension:  The EMPLOYEE will reach normal retirement 
under the current pension plan at age 65.  However, despite actual years of 
service, assuming he is employed by the CORPORATIONS for the entire period, 
he will have accumulated 18 years of service at age 65.  Notwithstanding the 
foregoing, the CORPORATIONS will calculate the EMPLOYEE's benefits as if he 
had accumulated twenty-five (25) years of service under the plan.  If the 
EMPLOYEE is not employed by the CORPORATIONS until age 65, then for each 
year of service, the EMPLOYEE will be credited with 1.4 years of service for 
the purpose of calculating his retirement benefits.  This provision shall be 
applicable only if and so long as the CORPORATIONS shall maintain a pension 
plan.

      If the CORPORATIONS shall elect to freeze or modify any existing 
pension plan and shall enhance or modify any contributory pension plan 
qualified under [SECTION]401(K) of the Internal Revenue Code, EMPLOYEE shall 
participate in such replacement or modified plan.

      12.  Long Term Incentive/Stock option Plan:  Each year, the EMPLOYEE 
will receive stock options with a "value" equal to 50% of his salary.  The 
stock value is determined by calculating the "Black-Scholes" value.  The 
exercise price will be determined annually by the CORPORATIONS' Board of 
Directors' Compensation Committee.  It is intended that the Committee will 
set the exercise price slightly above the then current market price for the 
stock of Merchants Bancshares, Inc.

      Options are exercisable at any time after two (2) years from their 
original issue date.  The term of the options will expire on the earlier of 
(a) ten years from the issue date, while EMPLOYEE remains employed by the 
CORPORATIONS, or (b) if EMPLOYEE's employment is terminated, then twelve 
months after termination of employment.

      If the EMPLOYEE is terminated without just cause or due to his 
disability, or in the event that any transaction occurs which results in a 
change of control of either of the CORPORATIONS from that existing on the 
date of this Agreement, the EMPLOYEE may exercise these options immediately 
upon the occurrence of any such event or at any other time permitted in the 
preceding sub-paragraph.  In the event that there is a split of the stock of 
Merchants Bancshares, Inc., EMPLOYEE's stock options and option price shall 
be adjusted accordingly, so as to leave EMPLOYEE in the same relative 
position as at the time of commencement of this Agreement with regard to the 
issued and outstanding shares of Merchants Bancshares, Inc., on the date 
such action is taken.  In the event there is a public offering of the stock 
of Merchants Bancshares, Inc. other than pursuant to a stock option or an 
employee stock ownership plan, at any time before the options granted hereby 
have been fully exercised, then the number of shares subject to the options 
granted herein shall be increased so that the total number of shares 
purchased and purchasable under these options as increased will bear the 
same relationship to the fully-diluted capitalization of Merchants 
Bancshares, Inc. immediately after giving effect to completion of the public 
offering as the original number of shares purchasable under these option 
does to the fully-diluted capitalization of Merchants Bancshares, Inc. at 
the effective date hereof.  The purchase price for additional shares covered 
by these options as provided in the preceding sentence shall be the greater 
of the purchase price provided for herein or the purchase price paid by 
third parties purchasing stock in the public offering.

      If the CORPORATIONS are unable to deliver the shares upon which the 
EMPLOYEE seeks to exercise his options, for any reason, then the 
CORPORATIONS shall pay to the EMPLOYEE, on the date of exercise, the 
difference between the exercise price and the trading price of Merchants 
Bancshares, Inc. shares on that day, as traded on the exchange on which said 
shares are listed.

      In the event that the EMPLOYEE shall become deceased during the period 
in which the EMPLOYEE may exercise his stock options, as provided above, 
then his Estate may exercise said options in the manner provided above; 
provided, however, that said options are exercised within six (6) months 
after EMPLOYEE'S demise.

      13.  Expenses:  The EMPLOYEE shall be reimbursed for documented 
business expense incurred or paid by the EMPLOYEE in connection with the 
performance of his duties, in the manner currently required by corporate 
policy.

      14.  Indemnification:  The CORPORATIONS agree that, within the limits 
set forth in the Vermont Business Corporations Law and Delaware General 
Corporation Law, as applicable, they shall hold the EMPLOYEE harmless for 
any actions taken by the EMPLOYEE in what he reasonably believes to be in 
the CORPORATIONS' interests or for his omission to so act or for his 
negligence in connection with such employment.  This indemnity shall include 
the EMPLOYEE's reasonable attorneys' fees and costs incurred in defending 
any such demands, claims, or actions.  The EMPLOYEE shall have the sole 
right to defend himself against any and all such demands, claims or actions, 
using counsel of his choosing.  The indemnity herein provided shall also 
include, but in no way be limited to, claims of liability arising for or on 
account of those acts or omissions of others described in Section 4 of this 
Agreement.

      Notwithstanding the foregoing and except to the extent insurance 
provides such indemnity, the CORPORATIONS shall have no obligation to hold 
the EMPLOYEE harmless from (i) any liability he may have to any governmental 
entity with respect to personal taxes, interest or penalties, unless that 
liability resulted from a liability of the CORPORATIONS (i.e. corporate 941 
taxes, interest and penalties, assessed against the EMPLOYEE through a 100% 
assessment by the IRS); (ii) any claims arising out of, based upon or 
attributable to the gaining in fact of any personal profit or advantage to 
which the EMPLOYEE is not legally entitled; or (iii) any claim arising out 
of, based upon or attributable to the committing of any criminal or 
deliberately fraudulent act.  Prior to receiving any purported personal 
profit or advantage, EMPLOYEE is entitled to receive, at the CORPORATIONS' 
expense, an opinion of counsel that he is legally entitled to receive it.

      This Paragraph 14 shall not limit any immunity or indemnity provided 
EMPLOYEE by law or by the Articles of Association or Bylaws of the 
CORPORATIONS.

      15.  Binding Effect:  This Agreement shall inure to the benefit of and 
be binding upon the EMPLOYEE, his legal representatives, heirs, and 
distributee(s), and upon the CORPORATIONS, their successors and assigns, and 
also any subsidiary or affiliated corporation.

      16.  No Waiver:  The waiver of any term or condition of this Agreement 
shall not be deemed to constitute the waiver of any other term or condition.

      17.  Notices:  All notices, elections hereunder and similar 
communication(s) shall be in writing and shall be sufficient if addressed to 
the EMPLOYEE at his address as shown above (or at any new address as he 
shall advise the CORPORATIONS of in writing) and mailed by certified return 
receipt with postage fully paid.  All notices to the CORPORATIONS shall be 
given to the presiding officer of their Boards of Directors.

      18.  Controlling Law and Attorneys' Fees:  Notwithstanding the actual 
place of execution, or the states of incorporation of the CORPORATIONS, this 
Agreement shall be governed by the laws of the State of Vermont and the 
parties hereto consent to the jurisdiction of the Courts of the State of 
Vermont.

      In the event of a breach of this Agreement, the non-breaching party 
shall be entitled to recover its costs and attorneys' fees from the 
breaching party.

      19.  Compliance with Law:  Any and all provisions of this Agreement 
shall be consistent and comply with applicable laws or regulations enacted 
or promulgated both before and after the execution date of this Agreement, 
and to the extent that any provision is inconsistent or does not comply with 
applicable laws or regulations, that part which is inconsistent or does not 
comply shall be modified to comply with the applicable law or regulation.

      20.  Prior Agreement Superseded:  This Employment Agreement replaces 
and supersedes an Amended Employment Agreement between the CORPORATIONS and 
the EMPLOYEE dated effective as of October 31, 1994, with the following 
exception:  The EMPLOYEE shall maintain all rights to incentive payments 
under paragraph 9 of such Amended Employment Agreement through June 30, 
1997.

      IN WITNESS WHEREOF, the CORPORATIONS have caused this Agreement to be 
executed by directors or officers thereunto duly authorized, and the 
EMPLOYEE has hereunto set his hand and seal, all as of the day and year 
first above written.

IN PRESENCE OF:                        CORPORATIONS


                                       MERCHANTS BANK


/s/ Stacey L. Russell                  BY: /s/ Michael G. Furlong
------------------------------         -------------------------------


                                       MERCHANTS BANCSHARES, INC.


/s/ Stacey L. Russell                  BY: /s/ Michael G. Furlong
------------------------------         -------------------------------



                                       EMPLOYEE


/s/ Stacy May Dimes                    /s/ Joseph L. Boutin
------------------------------         -------------------------------
                                       JOSEPH L. BOUTIN